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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I own a business that provides care for Mental Health Mental

Resolved Question:

I own a business that provides care for Mental Health Mental Retardation. I prepay the care providers with a loan from a bank. The loan is a personal loan since the business has no assets. As collateral the business gave me all of its shares of stock. The loan was $150,000.00.

Last year we had a very good year and were able to pay off the loan which allowed the business to receive their shares of stock back.

When tax time came my accountant told me my business could not deduct the money they spent to reclaim their stocks and I had to pay an additional $50,000 in taxes.

Is this correct?

Dick Knupp
Submitted: 3 years ago.
Category: Tax
Expert:  jgordosea replied 3 years ago.

Greetings,

 

In general, when a loan is obtained to pay expenses the deduction is when payments to the vendors are made, not when the loan is received, and then the later loan repayment is not a deduction (just like the receipt of the loan was not counted in income.)

 

Presumably the business deducted the payments to the care providers when those payments were made using the loan proceeds and reduced income in that year.

If so, the repayment of the loan is not now a deductible expense since that would be deducting those amounts a second time.

 

The tax liability was likely a result of income tax on the net profit which was not reduced by the loan repayments.

 

I hope this helps to understand that loans are not included in income when received nor deducted as expenses when the principal is paid. Interest on the loan is a deduction when paid and is income to the recipient of the interest.

 

Please ask if you need clarification.

Best wishes.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience: I've prepared all types of taxes since 1987.
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